A trader’s margin is the amount of money he or she must put up to open a trade. To open a trade when trading forex on margin, you only need to pay a proportion of the total value of the position. When it comes to leveraged forex trading, the margin is one of the most fundamental things to grasp, and it is not a transaction cost.
What is a margin call?
A margin call is a notice that an investor receives when their trading account is insufficiently funded to permit trading activity. A margin call is a notification that the equity balance in your margin account has dropped too low and no longer meets the margin requirements.
A margin call informs traders that they must add funds to their account, either by cash deposits or securities transfers. If they do not, the contents of their account may be put at risk.
If you receive a margin call, you must move quickly to enhance your brokerage account’s equity. Adding more money to your account is a simple way to accomplish this. Margin calls gained their name since the firm would give the trader the news over the phone. It’s possible that your company still conducts margin calls over the phone.
These days, many prefer to communicate by text or email. If your account contract allows it, they may also close some trades without warning after a margin call has been made.
Leverage and Margin call
To fully comprehend the margin call, you must first comprehend the relationship between margin and leverage in forex. These two can be considered two sides of the same coin. The minimal amount required to leverage trade is known as margin. Leverage, on the other hand, allows you access to the market by allowing you to trade huge positions with a lower initial investment.
Leverage and forex margin rate are linked in forex trading. The margin rate specifies how much of the entire transaction value can be used to open a deal.
Margin Calls in Forex Trading: Why Do They Happen?
A margin call occurs when a trader has no money left to trade. He requires additional finances. This condition occurs when trading losses reduce the usable margin below an acceptable threshold specified by the broker.
It occurs when a trader agrees to utilize a significant amount of their equity as a margin. This leaves very little room for losses to be absorbed. The following are some of the reasons for margin calls:
- If you keep a lost transaction for a long time, your useable margin will be depleted.
- You also over-leverage your account for this reason.
- If your account is underfunded, you will be forced to overtrade with very little useful margin.
- When you trade without a stop loss, the price swiftly moves oppositely.
How does a margin call work?
If you receive a margin call, you must act quickly to enhance your account’s equity. You can just add extra money to your account to accomplish this. Alternatively, you might deposit some securities in the account. Another option is to sell some of your shares and investments to reduce your debt.
The term “margin call” comes from the practice of brokers calling traders to inform them of a problem. However, traders are more likely to be notified of decreased margin amounts via email or SMS.
When you open an account with a company, you should inquire about how they would issue a margin call to you. You must also be aware of the amount of time you have to respond to this call. When a margin call is issued, some businesses close positions automatically. As a result, you should also inquire about this with the firm. You usually have a few days to solve the problem. If you do not respond, the company reserves the right to liquidate your positions to bring your account back into compliance with margin requirements. You won’t be able to react to whatever holdings are sold and at what price in this situation.
How Can You Stay Away From Margin Calls?
No trader wants to ever have to deal with margin calls. A margin call occurs when your trade has suffered so many losses that your broker requests additional collateral to complete the trade. However, if you can effectively manage your trades, that’s how you can prevent margin calls.
Amateur buy-and-hold traders are more likely to make margin calls. If a holding slips into losses, these traders are unable to sell it. As a result, they continue to deposit dollars into their account to sustain their losing position. Experienced traders, on the other hand, know when to reduce their losses and liquidate their lost positions.
How to avoid margin calls?
- Avoid over-leveraging your trading account. You should have less effective leverage. For forex trading, ten-to-one leverage is frequently advised.
- When it comes to risk management in forex trading, be cautious. With the stop loss, try to keep your losses to a minimum.
- Try to keep a good amount of free margin in your account to keep trading. A single trade must not use more than 1% of your account equity. Also, in all of your trades, do not employ more than 5% equity at any given time.
- Attempt to trade in smaller increments.
- Set up account alerts to receive notifications when your active trades begin to decline.
Margin trading has a high level of risk, making it unsuitable for all traders. If you wish to trade on margin, you should first examine your financial situation and risk tolerance.
If you want to learn how to manage margin calls in forex trading, you can enroll in a Capital varsity forex trading course, where you will study everything there is to know about the forex market and will be able to manage margin calls such as professional trader.